Natural gas wipes out 2013 gain as mild weather cuts demand

Natural gas declined for the second straight week in New York, wiping out a 2013 gain, as a mild start to August limited demand from power plants.

Gas futures fell 1.2% after forecasts showed below- normal temperatures from the East Coast to the Great Plains from Aug. 7 through Aug. 12, according to MDA Weather Services in Gaithersburg, Maryland. Prices have tumbled 25% from a 21-month high on May 1 as U.S. inventory increases exceeded five-year averages in seven of the past nine weeks.

“Natural gas is a wildly weather-dependent commodity,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. “Unless there is a hurricane or a massive temperature spike in the next couple of weeks, the price could remain under pressure.”

Natural gas for September delivery slid 4 cents to $3.347 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Feb. 22. Volume was 45% below the 100-day average at 2:57 p.m. The futures have fallen 0.1% this year after climbing to $4.444 on May 1, which was a 33% increase for 2013. Gas declined 5.9% this week, the biggest drop since May.

The discount of September to October futures was steady 2.8 cents.

September $3.35 puts were the most active options in electronic trading. They were up 1.6 cents at 11 cents per million Btu on volume of 871 at 3:35 p.m. Puts accounted for 58% of trading volume. Implied volatility for at-the-money options expiring in September was 30.88% at 3:15 p.m., compared with 31.09% yesterday.

Washington High

The high temperature in Washington on Aug. 5 may be 80 degrees Fahrenheit (27 Celsius), 8 below normal, and Chicago’s reading may be 4 lower than the average at 79 degrees, according to AccuWeather Inc. in State College, Pennsylvania.

Electricity generators, the largest consumers of U.S. gas, will account for 32% of demand this year, data show from the Energy Information Administration, the Energy Department’s statistical arm.

U.S. stockpiles expanded by 59 billion cubic feet to 2.845 trillion cubic feet in the week ended July 26, above the five- year average injection of 47 billion for the period, the EIA said yesterday.

Narrower Deficit

A deficit to five-year average supplies narrowed to 1.2% from 1.6% the previous week, EIA data show.

U.S. marketed gas production, which doesn’t include amounts flared or used to pressure wells, will increase 1.1% to a record 69.96 billion cubic feet a day in 2013, according to the EIA’s July 9 Short-Term Energy Outlook.

The gas-rig count rose by 19 to 388 as of today from the previous week, the most since March 29, according to Baker Hughes Inc. in Houston. The total is down 10% this year.

“Frenetic drilling activity has created a significant inventory of unconnected wells,” Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York, said on a call with clients today. “That’s why we think production will remain stable” even with the drop in dry-gas drilling this year, she said.

The U.S. met 87% of its own energy needs in the first four months of 2013, on pace to be the highest annual rate since 1985, EIA data show. Drilling technologies such as hydraulic fracturing, or fracking, have made it more economical to extract gas trapped in shale rock, such as the Marcellus deposit in the Northeast.

Relative Strength

Gas futures are on the verge of entering into an “oversold” territory, based on the relative strength index, or RSI, said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. The RSI for the front-month contract was 32.14 at 3 p.m. A drop below 30 is considered by some traders to be a buy signal, and a number above 70 can be an indication to sell futures.

While a weakening in the RSI may trigger a short-term price bounce, Yawger said the selloff to get there could trigger an even more significant breakdown in technical trading.

The 50-day moving average, which started sloping downward in June, is poised to cross below the 200-day moving average in three to four days, he said.

“That’s just not a good situation” and may push prices down to the next support area of $3.10 to $3.15, Yawger said.